Diversion of duty-free imports must be proved by independent evidence; shortage and process loss alone do not sustain customs penalties.

In an exemption-based advance authorisation regime, customs demand, confiscation, interest, and penalties cannot rest on shortage entries or trade descriptions alone. Independent evidence is required to show that duty-free imported inputs were diverted as such into the domestic market in breach of the actual user condition. A shortage explained as process loss in hulling operations, especially where a revised SION norm supports the claimed loss, does not by itself prove illicit removal. Export obligation discharge certificates and the DGFT clarification further support the importer where misuse of imported inputs is not established, and the customs demand and penalties do not survive.

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Issues: (i) whether the imported duty-free sesame seeds were diverted into the domestic market in violation of the actual user condition and condition (x) of the exemption notification; (ii) whether the shortage noticed on search could be treated as diversion, or was explainable as process loss; (iii) whether the DGFT clarification and export obligation discharge certificates negated the customs demand and penalties.

Issue (i): whether the imported duty-free sesame seeds were diverted into the domestic market in violation of the actual user condition and condition (x) of the exemption notification.

Analysis: The record did not establish clandestine sale of the imported material. The contract notes relied upon by the department were not found sufficient to show that the goods described therein were the imported raw sesame seeds, especially where the descriptions also referred to quality expressions commonly used in trade, and some contracts related to hulled sesame seeds or export out of country. No corroborative evidence of actual domestic purchasers or movement of goods into the local market was produced. In the absence of clear evidence of transfer or sale of the imported inputs as such, the allegation of diversion remained unproved.

Conclusion: The allegation of diversion and breach of the actual user condition was not established.

Issue (ii): whether the shortage noticed on search could be treated as diversion, or was explainable as process loss.

Analysis: The shortage was explained as process loss in hulling operations. The Tribunal accepted that the later DGFT public notice revising the SION norm reflected a realistic and beneficial correction to the earlier norm, and that the claimed loss was within the revised industrial understanding. The department did not produce independent evidence to connect the shortage with diversion. On the facts, the shortage could not by itself sustain a charge of illicit removal.

Conclusion: The shortage was not treated as proof of diversion and was accepted as process loss.

Issue (iii): whether the DGFT clarification and export obligation discharge certificates negated the customs demand and penalties.

Analysis: The DGFT clarification allowed export of resultant products using duty-paid domestic materials within the authorization period, subject to actual user conditions for imported inputs. The export obligation discharge certificates had been issued and the bonds were released. In the absence of proof of misuse of imported inputs, the customs demand for duty, confiscation, interest, and penalties could not survive.

Conclusion: The DGFT clarification and EODC supported the assessee and the duty demand, confiscation, interest, and penalties were not sustainable.

Final Conclusion: The departmental appeals failed, while the respondent's protective appeal did not survive independently and was rendered infructuous.

Ratio Decidendi: In an exemption-based advance authorization regime, customs duty, confiscation, and penalty cannot be sustained on mere shortage or trade-description records without independent evidence of diversion of the imported goods as such into the domestic market, particularly where the competent licensing authority has issued export-obligation discharge certificates and the alleged deficiency is explained as process loss within a revised and beneficial norm.

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